The Gilmo Report

January 10, 2018

January 10, 2018

Reports of China curtailing its purchases of U.S. Treasuries triggered a sell-off in bond and stock futures overnight, which in turn sent the market gapping down slightly this morning. In the grand scheme of things, a 100-point decline in the Dow isn’t much to sneeze at given that a 1% decline would burn up 250 Dow points. A little sell-off like that might not look so pretty on its face, but isn’t much on a percentage basis.

A little sell-off wouldn’t be such a bad thing, even if it were more of the short-term 2-3% type. Of course, that would equate to 500-750 Dow points. Again, the optics might not be pleasant, but the fact is that this is life in a Dow 25,000 world. Meanwhile, the market is off to its best start to any year since 1964, which is probably before most investors were even born.

By the close today, the indexes all finished in the red, but near the peaks of their daily ranges. While this ended the NASDAQ Composite Index’s six-day winning streak, the action overall had the feeling and look of support of the intraday lows.

 

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The S&P 500 Index also suffered its first down day of the year today, which ended its own six-day winning streak. All such winning streaks come to an end eventually, and the way this occurred today looks relatively benign, as all the major market indexes closed near the highs of the range, as I noted above. As they say, the market can’t go up every day, but when it goes down like it did today, the bullish tone is simply confirmed.

 

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With bonds coming off, the SPDR Gold Shares (GLD) seems to be forecasting inflation rather than lower rates. The yellow metal has traditionally been considered a hedge against inflation, since this also correlates to a declining dollar. Here we see a pullback to the 10-dma yesterday provided a secondary entry as the GLD held the line and bounced right off it.

 

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Kirkland Lake Gold (KL) has pulled into its 10-dma, in sync with the GLD. Volume declined today but was slightly above average. This puts KL in a lower-risk entry position here at the 10-dma as it pulls back following its late December breakout.

 

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When the market is rallying so strongly, the temptation is to want to buy everything. But, as I’m often fond of saying, it’s not a matter of being invested in every stock, just the right ones. Weight Watchers Int’l (WTW) has turned out to be one of those “right ones,” with a huge upside move over the prior two days. Helped along by news that Oprah Winfrey, who is a large owner of the stock, would run for President after her speech at the Golden Globe Awards, the stock launched to all-time highs on heavy buying volume.

Prior breakouts by WTW have run into trouble quickly, so it will be interesting to see how it acts once it does start to pull back. What is interesting to see is how the stock was setting up in “voodoo” fashion along and around its 10-dma, 20-dema, and 50-dma before the move. That was the reason I liked it in my last report.

So far, WTW isn’t giving up much of its gains, although it is a little on the volatile side on an intraday basis. Pullbacks closer to the breakout point, which is way down near the 52 price level, would perhaps present lower-risk entries or re-entries if you sold into the strong, two-day upside move.

 

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CSX Corp. (CSX) pushed to a new all-time high yesterday after breaking out on Monday. That breakout occurred on a five-day pocket pivot volume signature. The stock rolled in slightly today, and I’d watch the 10-dma as my first reference for support on any further pullback today. If one bought closer to the 200-dma down near the 52 price level per my initial discussion of the stock, one could consider holding through earnings, which are expected on January 16th. That is made much easier by the fact that the profit cushion from the 200-dma is quite sizable.

 

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Caterpillar (CAT) is sitting at new highs after finding support at its 10-dma last week. So far it is acting like a powerful leader, despite looking somewhat parabolic and “late-stage.” But as I am fond of saying, late-stage is as late-stage does, and the fact that it held tight support on last week’s pullback to the 10-dma is constructive. Earnings are expected on January 25th.

Apple (AAPL) is tucking into its 10-dma, 20-dema and 50-dma here at the top of its current base. A breakout may be imminent, or the stock may just bide its time until earnings are reported, as expected on February 1st. Breakout buyers can watch for a breakout to pick up shares, or one could step into the stock here at this confluence of three moving averages.

 

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Netflix (NFLX) has been way extended for the past several days. Earnings are expected on January 22nd. So far, a very nice move from the pocket pivot of December 28th, and certainly sufficient cushion to hold through earnings.

Facebook (FB) is still extended as I see it, but strict base breakout buyers could consider it actionable since it is barely 2% or so out of its base. The stock acts well, but it’s not like there has been any massive upside thrust in the stock since its pocket pivot of seven trading days ago. Earnings are expected on January 31st.

Amazon.com (AMZN) is also still within range of its recent base breakout and therefore buyable on that basis. Earnings are expected on February 1st.

Nvidia (NVDA) gapped up on Monday as it finally broke out to new highs. This can be treated as another buyable gap-up (BGU), using the 218.58 low of Monday as a tight selling guide.  Earnings are expected on February 8th.

 

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Tesla (TSLA) was sitting at the fence over the weekend, and my discussion of the stock was two-sided at best. As I wrote, “If it clears the 50-dma it could very well turn into a long trade, but if it rolls away from the 50-dma on the downside, then it’s a short right there using the 50-dma as a guide for a tight upside stop.”

With several brokerage firms downgrading their outlook for the stock recently after its reported poor delivery and sales numbers, perhaps the stage was set for a contrarian move in the stock. That’s precisely what happened as the stock triggered a moving-average undercut & rally (MAU&R) move on Monday, slicing right through its 50-dma on the upside. It is now back above its 200-dma, where it is holding support as volume dries up. Surprise, but it can be considered buyable here along the 200-dma, using the line as a tight selling guide. Craziness.

 

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Apptio (APTI) pulled into its 20-dema yesterday, putting it in a lower-risk buy zone. So far, the stock hasn’t been able to hold a breakout, but at the same time it hasn’t failed entirely. This would therefore be a last-stand entry along the 20-dema and the top of the prior base, using the 20-dema as a tight selling guide.

 

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MuleSoft (MULE) gapped down to the top of its prior low-base range breakout, but held support at the 10-dma on heavy volume. Earnings are expected on January 25th.

 

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Cloudera (CLDR) quieted down yesterday as volume dried up nicely, leading to a buyable gap-up move today on strong volume. That move was buyable at the open, but the bottom line is that I had previously viewed this as buyable along the lows of the base and then again along the 10-dma and 20-dema, per my discussion of the stock over the weekend.

That said, today’s BGU was actionable near the open, using the 17.52 intraday low as your selling guide. Technically, it is still within buying range since it’s just under 5% above the 17.52 price level. I find it interesting that often these types of BGUs in recent IPOs will occur on days when the market is gapping down at the open or otherwise looking “scary” at the time. Such was the case with CLDR today.

 

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Rise Education Cayman Ltd. (REDU) dipped below its 10-dma yesterday but held above the line today as volume remains very low. I would look at this as an add point following the prior late-December base breakout. That breakout was buyable before the breakout occurred as the stock sat tightly along its 10-dma with volume drying up sharply, as I discussed in my report at that time.

 

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Stitch Fix (SFIX) is still viable here as a long entry since it has been able to continue holding support at the 20-dema and the top of the prior base breakout. Volume is drying up sharply, and today came in at -78.1% below average. This is therefore buyable here using the 24 price level as your selling guide.

 

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Salesforce.com (CRM) has just barely poked into all-time high price ground, but remains extended from any lower-risk entry point. Meanwhile, Workday (WDAY) is showing incredible recovery strength as it blasted higher today on a buyable gap-up move. This would have been actionable using the the111.76 intraday low as a selling guide. Technically it remains within range, but the stock overall strikes me as somewhat extended at this point. An amazing Ugly Duckling comeback.

 

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Square (SQ) tested its 50-dma yesterday early in the morning. The sell-off was a bit unnerving, however, as it occurred very quickly after the open, taking the stock down nearly 5% in a flash. It found support at the 10-week moving average on the weekly chart, holding above the 50-dma, and then turned back to the upside.

Currently it sits in a “happy place” just above its 50-dma. As it does so it is tracking tight sideways with volume drying up to -46.3% below-average. This may simply go tight sideways for a bit more, and I’d look to use any pullbacks closer to the 50-dma as lower-risk entries if I can get ‘em. Overall, however, it appears like it wants to come up the right side of this potential new base.

 

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First Solar (FSLR) is tracking tight sideways along its 20-dema after posting an undercut & rally last Thursday, four trading days ago on the daily chart. It is holding squeaky tight here within what is not quite a five-week base, and volume came in today at -44% below-average. This is in a buyable position using the 20-dema as a tight selling guide.

The one paradox about FSLR is that there aren’t many other solars acting as well. Daqo New Energy Corp (DQ) has been another strong one, but rather thin, along with SEDG, which is more of a solar-storage play. But I think if I’m going to play solars, I’ll go with the leader, which for now is FSLR.

 

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Alibaba (BABA) and Weibo (WB) are both sitting right at the highs of their current bases, without breaking out just yet. They were last buyable on the big pocket pivot moves they had coming up through their respective 50-dmas last Tuesday, as I blogged at the time. The 10-dmas for each would be your references for support on any deeper pullbacks that might make them lower-risk entries, BABA’s 10-dma is at 183.27, while WB’s is at 113.94.

YY, Inc (YY) remains within range of a breakout from a five-week base that occurred on a pocket pivot volume signature. However, today the stock pulled into its 10-dma on volume that was -43% below average, presenting a lower-risk entry opportunity near the line.

 

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Lumentum Holdings (LITE) is looking like it wants to make a move here. I discussed this in a blog post over the weekend. The stock has been sitting right at its 10-dma and 20-dema with volume drying up, but over the past two days we’ve seen volume pick up a bit. Yesterday it sold off likely in sympathy to Applied Optoelectronics (AAOI), which was downgraded by an analyst on the basis of its slowing 100G network business.

In my view, and as I intimated over the weekend in my blog post, the build-out of 4G fiber-optic networks is no longer the big driver for these so-called optical names. VCSEL, or 3-D sensing, diodes are. LITE is the leader in that space. I like the stock here as an Ugly Duckling type of play, using the 10-dma as a tight selling guide.

 

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For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

Given its extended state, and the extended state of many leading stocks, the market is certainly entitled to a pullback. Today’s pullback looked like it might turn into something more significant, but the market remains very stubborn when it comes to giving back its gains so far in 2018.

For me, the question is where the new set-ups are at right now, and I see several situations that are percolating, as discussed in this report. Most of the big-stock techs are up and out of there, although some do remain within buying range of recent base breakouts.

As a sign of a strong market, I’d like to see some of these percolating recent IPOs start moving, and the action in CLDR today was encouraging in this regard. Other big-stock leaders are also forming bases and may be on the verge of breakouts, such as AAPL and FSLR, for example. As you know, I prefer to buy them in the base when they are pulling into logical areas of support as volume dries up.

With some gurus calling for a top and bear market in bonds, the obvious question in my mind is whether money will indeed start to flow out of bonds in earnest. And if it does, will it move into stocks? If the rise in gold, combined with the decline in the dollar and bonds is signaling that inflation is coming, then stocks have also been viewed as a traditional hedge against inflation.

For that reason, money flows out of bonds could easily end up in equities, as I see it. I’m not sure if a 3% 10-year Treasury Note yield is enough to get institutions hot and bothered, since the potential for stocks in an inflationary environment may be greater. For that reason, I remain focused on actionable set-ups in individual stocks. For now, the trend remains to the upside.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held s positions in LITE and SQ, though positions are subject to change at any time and without notice.

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